Banks Fight Big Rate-Rigging Case

Could a group of banks have all decided independently to drive down a key interest rate and not tell one another?

That will be the key question as banks fight back against charges that they swindled clients out of billions in dollars by manipulating the level of the London Interbank Offered Rate, better known as Libor.

Barclays has admitted to improper attempts to influence Libor, intended to be the average rate at which banks lend to each other, and a key rate used to set everything from mortgage rates to credit cards. Libor is a calculation based on submissions of interest rates by major banks. The British Bankers Association, a trade group in London, collects the rates submitted by a panel of banks, up to 20 banks depending on the panel; Thomson Reuters calculates the rate daily.

Among other things, British bank regulators charged that Barclays had low-balled its version of the rate during the financial crisis to make it appear it was not desperate for cash, and in turn to appear healthier than it really was, among other things.

Barclays paid a total $451.6 million civil fine to U.S. and British authorities. Its chief executive Robert Diamond and two other officials have resigned, with one reportedly admitting he had instructed Barclays executives to submit intentionally low rates. Barclays also informed the Federal Reserve Bank of New York that it was aware that other banks submitted artificially low Libor quotes as well.

Regulators, federal investigators and Congress are probing the extent to which the banks colluded in setting low rates. And such collusion is at the center of a civil lawsuit that Charles Schwab filed against a dozen big banks including Barclays, J.P. Morgan Chase (JPM), Bank of America (BAC) and Citigroup (C), alleging it was swindled out of "tens of billions" of dollars due to an alleged rate-rigging scheme in violation of U.S. antitrust law. The city of Baltimore has also joined the suit.

What’s more, Schwab is alleging the banks’ actions run afoul of the federal Racketeer Influenced and Corrupt Organizations Act, or RICO, which allows for massive penalties and fines (and is typically used against organized crime.)

But the banks are arguing that, while Libor may have indeed been manipulated, they didn’t collude in driving it down. Officials close to the bank tell FOX Business that will the crux of their defense.

“There’s simply no evidence or proof showing all the banks systematically talked to each other and colluded to drive down Libor on any given day,” an executive at Bank of America tells FOX Business. “There was no joint action by competitors to restrain competition in some market.”

What officials at the banks fear most is that the U.S. government could use the Schwab suit as a template for its own legal actions, executives say.

In its lawsuit, Schwab says the banks conspired to depress Libor so as to save money by paying lower yield on “tens of billions of dollars” worth of short-term paper the banks sold to Schwab’s money market and bond funds, bilking Schwab out of “hundreds of millions, if not billions” of dollars. The banks reaped “ill gotten gains,” Schwab’s lawsuit, filed in 2010, says.

But the banks tell FOX Business that Libor is a purely voluntary activity that banks offer to help out in setting other rates. “There’s no single, objectively verifiable ‘correct’ Libor number floating out in space somewhere to point to, and there is no Libor law governing which rates we’re supposed to offer up. It’s hypothetical,” the executive at Bank of America says.

What’s more, Libor submissions “do not reflect actual borrowing rates from completed transactions, but rather hypothetical rates at which the panel banks believe they can borrow on a given day,” the executive said. "So, somehow, a low rate the banks voluntarily provide to a private trade group that the banks themselves base their own investments on, somehow that's collusion? A low, variable floating LIBOR rate could hurt the banks on the securities the banks themselves own. Much of this involves thought crimes."

In fact, so the argument goes, it makes no sense to collude to drive down the value of Libor because it makes banks look weaker in front of their competitors and partners. A low-balled quote “would naturally require circumspection rather than discussion/agreement,” a bank official says, because in so doing “the banks would be red flagging to each other, their competitors, that they are in trouble,” in turn causing their rivals to swim around them like sharks.

“Allegations thus suggest independent, rather than collective, action,” he says.

There also remains an issue of whether anyone was truly victimized by a manipulated Libor. Consumers probably saw rates stay artificially low on their home mortgages and credit cards because of the change, and there were a number of investors who made money off Libor-based instruments because of the low quotes.

Banks have argued in court that, for its part, Schwab hasn’t shown any bank documents, statements, or emails to back up its claim that the banks submitted “phony” rates, raising the sense among the banks that this suit is “a fishing expedition.”

Schwab did not return calls seeking comment as to whether it has asked for these items in discovery.